Airlines Withdraw Internet Commissions

Northwest Airlines and KLM Royal Dutch Airlines said Wednesday that effective March 1st, they will no longer pay commissions on Internet ticket sales in the United States and Canada.

In response, the online travel company Travelocity (Nasdaq: TVLY) said that it would begin charging $10 service fees on tickets for Northwest Airlines and KLM.

"We are surprised that Northwest and KLM would put themselves at a competitive disadvantage by forcing us to charge a service fee that we must now pass on to consumers," said Travelocity president and chief executive officer Terrell B. Jones.

The airlines had been paying Web travel sites a 5 percent commission, with $10 cap per ticket, reports said.

Jones pointed out that the direct competitors of Northwest and KLM are going to continue paying commissions for online ticket sales .

Betting on Orbitz?

Because Northwest is a partner in travel mega-site Orbitz, which is scheduled to be launched this summer by a consortium of most of the major airlines, analysts are saying that the move to cut online commissions may be part of an industrywide trend to change the structure of the online travel business.

Orbitz -- which is backed by airline giants American, Continental, Delta, Northwest and United -- has drawn much criticism even though it has yet to launch.

Whether the online air travel reservations site poses an anti-competitive threat to online travel sites and offline travel agents is being reviewed by the U.S. Department of Transportation and U.S. Department of Justice.

When asked to comment on Northwest's decision to cut Internet travel commissions, Orbitz spokeswoman Carol Jouzaitis told reporters: "We're affected just like any other online travel agency. We're as dependent on commissions for our revenue as anybody else, and we'll have to figure out a way to replace that revenue."

Taking Stock

Travelocity's stock price was driven down US$6.48 to $15.77 in early morning trading Thursday, following reports of downgrades by analysts at Legg Mason Wood Walker and CIBC World Markets, who were reacting to the news.

At Legg Mason, analysts downgraded Travelocity to market perform from buy, and also lowered their rating on competitor Expedia (Nasdaq: EXPE) to market perform, saying they expect Expedia to match Travelocity's move or stop booking Northwest tickets. Expedia was down $3.25 at $12.38.

"It is very likely, in our opinion, that all of the major airlines will either eliminate online commissions in the coming weeks or that Northwest will reinstate its commission," Legg Mason analysts wrote in a research note. "We have no opinion as to which result is more likely."

One of Two Ways

Added Legg Mason: "Online travel sites must institute fees to be financially viable if they are not paid commissions. We expect fees to become common in the near term. The question begs, however, whether customers will pay a fee or go directly to an airline's site."

Both Travelocity and Expedia "have value" even if airline commissions were to be scrapped, since they offer maps, packages and other value-added services to consumers, wrote Legg Mason. "We'd be buyers" of either stock at prices below $10 a share, the analysts wrote.

For its part, Travelocity said it is still "competitive" even with the $10 fee, noting that brick-and-mortar travel agencies sometimes charge fees of $20 or more for each ticket.